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Next warns on coronavirus as sales rise

Next has reported a lift in full-year profits and sales, and has implemented a stress test for if its sales dip below £1bn amid the coronavirus outbreak.

Next’s group sales were up 3.3% to £4.2bn in the year to 25 January, compared to the same period in 2018/19. Full-price sales, excluding items sold in the mid‐season, end‐of‐season Sale events and clearance operations, rose by 4%.

Online sales increased by 11.9% to £1.9bn, as a result of improved stock availability, achieved through the faster processing of customer returns.

Turnover in the year for Label Brands - third-party branded products sold through its online platform - was £510m and net margin was 15%. Total sales were up 23% and full-price sales were up 22%.

In-store retail sales dropped by 5.3% to £1.95bn, and full-price retail sales were down 4.3%. Next said it believes retail sales were improved by better shop‐floor stock availability. During the year the retailer increased the frequency of deliveries at a cost of £1m, closely aligning delivery processing shifts to van arrival times to reduce delay in getting stock onto the shop floor.

Profit before tax (including IFRS 16) rose by 2% to £734m.

In its full-year trading statement Next chief executive Lord Wolfson announced the company has implemented a coronavirus stress test. It gives the likely cash and profit impact for different levels of sales decline. The scenarios model full price sales losses of £445m, £820m and £1bn respectively. These declines represent a 10%, 20% and 25% decrease in the retailer’s annual turnover.

The stress test details various measures Next could take to control costs and conserve cash within the business, given differing levels of sales decline. These potential measures include the suspension of the buyback programme, the delay of discretionary capital expenditure, the sale and leaseback of a warehouse, the part securitisation of customer receivables, the redemption of a loan to its Employee Share Ownership Trust (ESOT) and potentially the deferral of its August dividend. Beyond that it said it could suspend rather than delay dividends.

“When the pandemic first appeared in China, we assumed that the threat was to our supply chain. It is now very clear that the risk to demand is by far the greatest challenge we face and we need to prepare for a significant downturn in sales for the duration of the pandemic”, Wolfson said.

“We have no experience of a similar crisis so there is no way of predicting the extent that the effect of coronavirus will have on our retail and online sales. It is not yet clear how widespread the virus will be at any one time, how long the pandemic will last and what the medium to long term effect of this pandemic will be on consumer behaviour.”

He added: ”The evidence we have from sales to date in the UK and from our (small) international websites in the worst affected countries is that: demand will be the biggest issue and although the virus is likely to impact our operations, we do not believe this will be as damaging as the very significant drop in sales sustained both in retail and online; Online sales are likely to fare better than retail but will also suffer significant losses; People do not buy a new outfit to stay at home. There is some evidence from our overseas sites that as restrictions on movement increase, the difference between online and retail sales performance widens, with online picking up a small amount of the business that cannot be carried out in store; Some product areas are likely to fare better than others. To date, our homeware and childrenswear sales appear to be less affected than our adult clothing lines.”

”Our priority is to do all we can to keep our workplaces and shops as safe as possible for customers and staff. At the same time we must prepare the business for varying levels of sales declines. To that end we have modelled the effects of differing levels of sales declines along with all the measures we can take to ensure that the company remains within its bond and bank facilities.”

The retailer said it has ”reasonable expectation” that the group has adequate resources to continue its operations for the foreseeable future.

”It’s not about making a profit any more, but surviving,” retailers have told Drapers after prime minister Boris Johnson demanded “drastic action” to combat the spread of the Covid-19 coronavirus this week.

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